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How Virgin is flying through a big profit plunge

Sydney Airport

It’s not profit numbers that’re driving the earnings season. It’s expectations.

You only need to look at the Virgin Australia Holdings Ltd (ASX: VAH) share price after it posted a whopping first half loss.

The airline swung to a pre-tax loss of $99.9 million for the six months to end December 2019 compared with a profit of $87.7 million in the year before.

Holding altitude

The stock managed to hold it ground to trade flat at 12 cents in late afternoon trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index nosedived 2.3%.

The bad news was largely anticipated and Virgin managed to grow revenue by 1.5% in the period to $3.1 billion as it carried 2.1% more passengers.

This was just before the coronavirus outbreak and the airline warned that the emerging pandemic would shave between $50 million and $75 million off earnings over the next few months.

Silver-lining in the dark clouds

This hasn’t quote spooked investors though as they knew this was coming. After all, other travel stocks like rival Qantas Airways Limited (ASX: QAN) and Flight Centre Travel Group Ltd (ASX: FLT) have previously flagged a hit to profit.

What may also be providing reprieve to Virgin is its embattled Tigerair Australia airlines. The budget airline posted $2 million in earnings before interest and tax (EBIT) for 1HFY20 compared with a $6.6 million EBIT loss in the previous corresponding period.

Tigerair’s turnaround was supported by better RASK (average revenue per seat kilometre) and yield. This could be an early sign that the worst may be over as management cuts costs by cutting some unprofitable routes and using only one aircraft type.

Outlook not so bad

Flat is the new up for Virgin too. While the coronavirus creates an air of uncertainty for many companies (not just those in the travel business), Virgin thinks it can still hold revenue steady in FY20.

Virgin’s chief executive Paul Scurrah also pointed out that more good news could be coming.

“While the half year has seen us grow revenue and passenger numbers along with strong RASK improvement, we are still in the early stages of transitioning our business to a lower cost base,” said Mr Scurrah.

“Therefore, the benefits of cost changes and further revenue efficiency have yet to be realised.”

Gaining velocity

Another significant development in the period was Virgin buying back the 35% stake in its rewards program from private equity. Virgin now owns 100% of Velocity (its loyalty program) and said the program enjoyed strong growth and cashflows in recent years.

Loyalty cards are a big business – just ask Qantas. Virgin believes it can extract $20 million in synergies from Velocity.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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